Interview Fatih Birol, Chief Economist of the International EnergyAgency

"European countries missed a big opportunity by closing their doors to shale gas in a dogmatic way"

Energy decisions that are being made in Europe are seriously hurting the European economy, says Fatih Birol, Chief Economist of the International Energy Agency (IEA) and the guiding spirit behind the IEA's flagship publication, the World Energy Outlook, in an in-depth interview with EER. In particular, Europe has failed to use the trump card of unconventional gas to obtain more favourable terms from its major gas suppliers, says Birol. As a result, European industry and consumers are faced with unnecessarily high energy prices.

Fatih Birol (c) Osman Orsal / Reuters
It is no exaggeration to say that the World Energy Outlook (WEO), produced under the guidance of the IEA's Chief Economist Fatih Birol, has achieved the status of the premier Global Guide for Energy. In recent years the WEO (pronounced by insiders to rhyme with "Rio") has also evolved from a purely analytical work to an increasingly influential set of policy recommendations for governments. In particular its messages about the urgency of the climate change problem have become ever more pronounced.

Turkish national Birol, who joined the IEA from OPEC in 1995, became the WEO's lead author in 1999, when the books got their characteristic red-and-yellow covers. Every year in November when a new WEO is published, Birol – a Galatasaray football club fan who does not own a car – goes on tour to present its main findings to selected international audiences. EER spoke with him when he visited The Hague last Thursday.

How is the World Energy Outlook put together?

I have a large team of 40 people with whom we write the WEO together, along with input from about ten external experts. We have fact-finding meetings and workshops. We also send out draft versions to about 200 peer reviewers.

Who decides what the major topics will be?

I choose the topics, along with my colleagues, as we strive to discover new insights into energy markets. 

In addition to the breakthroughs we identified, we have also been pushing a couple of agendas that are not very fashionable
For example this year two main topics were Iraq and energy efficiency. Our aim is to make an original value-added analysis to make people, including ourselves, understand the global energy picture. Sometimes the results surprise even me. For example, we found that in 2035 India will have a per capita power consumption equal to what the US had in 1947. I find that very remarkable. This type of result puts global energy developments in a broader perspective.

Who writes the executive summary with the main conclusions?

Basically, I am in command, though I get help from my colleagues. This is the most critical part: to sit down and write a synthesis, to write down what it all means. I do this with my team, with a lot of coffee.

It seems that in recent years almost every year the WEO identifies some new "game changers".

Yes. What I am particularly happy with is that we first identified how much of a game changer shale gas was going to be. We have also identified that China would become the largest energy importer in the world and that China would become a net importer of coal, which few people saw coming. Most recently we have identified the enormous importance Iraq will have for the global oil market.

You also seem to have become stronger on policy recommendations.

In addition to the breakthroughs we identified, we have also been pushing a couple of agendas that are not very fashionable, that's true. One example is energy access for all, an important development topic that we have been covering since 10 years in the WEO. Another one is climate change. We used to do purely analysis, now we have taken on more of a public policy role.

This year you are not stressing the urgency of the climate change problem as much as before.

Climate change is struggling, it is sliding down the international political agenda. But we want to push it back up again. Let me tell you that our next project is to make a special report next year about climate change. We are approaching the crucial year 2015 and we want to provide a basis for international policy on climate change.

Policymakers have so far not done what you wanted them to do.

I hope that President Obama will be able to do more on climate change in his second term. He made a very good speech about it today. When I look at the general picture, I see that the Atlantic Ocean has been widening in recent times. I would like to see it narrow again. I think that one way of doing this is a reconciliation of climate policies between the US and Europe. I hope the US and EU will take major steps in order to jointly address this very important global problem.

How do you look at the development of carbon capture and storage (CCS) in this context? In Europe for one, CCS is not getting off the ground, as EER has reported.

When I look at our projections, it is clear to me that the world's energy supply will be dominated by fossil fuels for many decades. Without CCS our chances to achieve the 2 degrees target [i.e. to keep global warming within 2 degrees Celsius, editor] are close to zero. But I have to be realistic. The appetite for CCS has gone down. I would say to policymakers that if they are serious about climate change, they should at least make sure that CCS will not go down so much that it won't be able to ever get up again. We definitely need CCS.

What else is there policymakers can do?

There is a lot they can do. I will give you an example. This year when we released the WEO we got tremendous media coverage, with WEO as one of the most quoted news items on the internet. Yet in all this coverage many missed an important point. Everyone talked about how light tight oil production is reducing the need for the US to import oil.

Almost nowhere in the world, with one or two exceptions, do fuel efficiency standards for trucks exist
US imports will go down from 10 million barrels per day to 4 million over the next few years. But out of this reduction, fully 45% is due to the Obama administration finally having been able to introduce fuel efficiency standards for cars in the US. Many missed that story. And US cars are still less energy efficient than Japanese or European cars. We also paid special attention to trucks in this year's WEO. We found that oil use by trucks will soon equal that of passenger cars. But almost nowhere in the world, with one or two exceptions, do fuel efficiency standards for trucks exist. So here is where policy can make a big difference. Energy efficiency is another example which we highlighted in this year's edition. Energy efficiency could be another unconventional gas revolution if policymakers would take the necessary actions.

Does this notion that the US, long the world's largest oil importer, could become "energy independent" in the future, mean that "peak oil" is dead?

I still think that there will be difficulties to bring oil to the market in terms of meeting demand and also to make up for the decline of existing fields. Don't forget that of every four barrels of extra oil that we need over the next 25 years, only one is needed to meet demand growth, and three to compensate for the decline of existing fields. So the growth coming from the US and Canada should not make us believe that we now have plenty of oil for many years to come and everything will be picobello. There are still large political, technological and geological challenges.

How will US oil production growth change the role of the US in the international energy market?

That is another point about which there has been quite a bit of misconceived speculation. The US becoming the world's largest oil producer, overtaking Saudi Arabia, is a big story, yes. But it should not be taken to mean that the US will become the next Saudi Arabia. It will not. Saudi Arabia is and will remain for several decades the largest oil exporter of the world.

You are also forecasting that Iraq will overtake Russia to become the second largest oil exporter in the world. How realistic is this in view of the safety risks in that country?

It is true that the safety risks are considerable. But there are also risks in other parts of the world. Iraq is already the 3rd largest oil exporter in the world and the country has a different investment framework than many other oil exporting countries. Foreign money can flow freely into Iraq, which is unlike many other countries where it is forbidden by the constitution for foreigners to own energy assets. This makes Iraq attractive for international oil companies. Anybody can go in there.

In an earlier report you have said that we can expect a "golden age of gas", thanks in large part to the shale gas revolution which has shaken up the US gas market and is now being exported to other countries. How will this golden age of gas affect the European gas market?

What worries me, as someone who lives in Europe, and comes from a country that is – or should be considered – part of Europe, is that Europe is affected in the worst way by the developments in the global gas market. There are different reasons for this. First, shale gas in the US is increasingly pushing out coal in power generation. The share of coal has gone down from 50% to 31-32% in just a few years – incredible. As a result, the US has increased its exports of coal to Europe, which has led to a crash of coal prices in Europe. This has had devastating consequences for the European gas market. Did you know that  in 2011 the EU had second largest coal consumption growth after China?

Secondly, European countries missed a big opportunity by closing their doors to shale gas in a dogmatic way. Some countries banned shale gas without even knowing if they had any! As a result, Europe has not been successful in using the trump card of unconventional gas to obtain better terms from its major gas suppliers, in the sense of improving existing contracts and designing new contracts. Some contracts have been improved, but not enough. At current coal prices, you need a carbon price of at least €60 a ton to get oil-indexed gas to compete with coal in power generation.

At this moment European gas prices are 4 to 5 times higher than in the US. Five years ago they were more or less equal. This is creating a very negative situation for European consumers. Power prices in Europe will be 50% higher than in the US and three times more than China. That's a major problem for the European economy. Something needs to be done about that. EU policy should be much stronger on this. The energy decisions being made in Europe right now are pushing Europe into difficult economic times.